Are PSA Guarantees Safe?

Question

Apologies for the incessant questions but I have another with respect to the deal I'm involved in (fitness center here in California).

The property in question isn't set to be completed until April of next year but the seller wants to close ASAP. We won't get a Certificate of Occupancy until construction is complete which is several months after close of escrow.

PSA states that the seller will guarantee delivery of Certificate of Deposit once construction is complete even though the terms of the LOI stated we would receive the Certificate prior to close.

Question is, is it safe to assume the seller will deliver the Certificate or are there possible/potential complications that can arise that would prohibit them from doing so? Is a "guarantee" in a PSA safe?

Joel Owens · Answer

If it's a large national fitness chain they usually DIVE DEEP on a developer to make sure they can perform on time and do what they say they can do.

If the chain makes announcements for opening dates and expansion plans etc. and developer has problems it can look bad on their brand to the consumers. Is this developer working alone? Sometimes they have a larger national developer partner the brand feels more comfortable with and then the smaller local developer is the junior partner.

Your dad needs a local commercial retail attorney with new construction and development experience. They cost about 300 plus an hour or so. This size deal level it could make sense to have one. You have to read the forward commitment lease. In it the tenants usually have tons of provisions of trigger points that still obligate the owner post opening until they are completed.

Stanley Bronstein · Answer

@Joel Owens is correct.  You need a commercial real estate attorney on this one.

Ronald Rohde · Answer

Developer has run out of cash, your odds of suing him and receiving a meaningful recovery are 10%. Watch the property, see if he has a construction lender, swoop in to fix up the pieces. People make good money buying distressed properties, but you have to be willing to negotiate and see him in pain.

Ken Jernigan · Answer

Account Closed It's just that I've been involved in two different commercial deals that were construction and neither developer had the money to complete. We didn't find out until late in the process, so shame on us. One we found a construction lender for him through a long hard process and the other we had to dump the developer and start all over again.

Jessica Zolotorofe · Answer

Is the seller an individual or an entity that will likely be dissolved once the transaction is completed (or at least be depleted of assets)? Is there an indemnification provision in the contract? Does the provision say expressly that it survives closing? Nothing in the real estate world is a sure thing, but a guaranty helps if it is made by someone with some assets that you can actually go after if they default. Why would you want someone else doing work on your property, though? Make sure they are insured and only use licensed professionals! Can they even get a CO in your jurisdiction without owning the property, or might it become a headache for you even if they comply?

Stanley Bronstein · Answer

Account Closed  Once a party has your money, nothing is guaranteed, regardless of what it says in writing.

Phil Christian · Answer

I don't want to sound rude but you keep posting questions related to this deal and it sounds like you are in way over your ski's.... You are only giving little nuggets of information about the deal structure and candidly it doesn't sound like you are focused on the actual deal structure itself.

From what I have gathered... you are trying to by a building that is currently under construction.  The scheduled construction completion date is April 2019.  Are you buying a vacant building or a building with a tenant in tow?  If with a tenant in tow, when is the tenants lease start date and what is the trigger for that particular lease commencement.  Generally speaking, the lease commencement is the Certificate of Occupancy (but it could be structured differently).

If no tenant in tow, you are buying a building under construction (partially built).

Is there a CUP in place to allow a fitness center? Is a fitness center permitted by the zoning?

What exactly are you buying? Do you have a set of the construction docs? It sounds like you are expecting the Seller to sell the building partially built and then they will stay on as the developer? What incentive do they have to complete the project by April 2019 if you have already closed on the project? Who is the General Contractor? The GC's contract most likely states that their scope is finished once a certificate of occupancy is issued.

The Seller doesn't really control the Certificate of Occupancy, the city does.  The certificate of occupancy is issued by the City and states that all conditions of occupancy have been met (building, permitting, fire, etc).

The way I'm reading your question, to me, you are putting the cart before the horse here and are concerned if the Seller is going to mail/email you a certificate of occupancy... which the city would have on file anyways.  More importantly who is responsible to do all the work and under what structure all the way up to the final permits being completed?

Ken Jernigan · Answer

I would ask why he wants to close before the project is delivered. Have you verified he has the funding to complete?

Russell Brazil · Answer

You can not guarantee what a 3rd party will do.  In this instance the 3rd party is the government, so no, you can not guarantee that the 3rd party will absolutely do something.  Probable, maybe, but guarantee no.

Wayne Brooks · Answer

As the end user, I wouldn’t close until it was complete, CO issued and punch list items completed.

Are PSA Guarantees Safe?

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